High Court of KeralaDivision Bench2013-12-10Appeal dismissed

Commissioner of Income Tax, Thiruvananthapuram v. Southern Borewells

Case / Petition Number:ITA No.205 of 2012

Case Details & Bench

Court: High Court of Kerala
Hon'ble Judges: Manjula Chellur, CJ
A. M. Shafique, J.
Judgment Date: 2013-12-10
Court Decision / Holding: Appeal dismissed.
Final Disposition: Appeal dismissed

Parties to the Case

Appellants / Petitioners

THE COMMISSIONER OF INCOME TAX, THIRUVANANTHURAM.

Respondents

M/S.SOUTHERN BOREWELLS, SHREYAS, SASTRI JUNCTION, KOLLAM, PIN - 691 001.

Legal Representation & Advocates

Counsels for Petitioners

• Sri Jose Joseph, S.C.

Case Synopsis & Summary

This is an ITA hearing in the Kerala High Court challenging the ITAT Cochin Bench’s decision in ITA No. 415/Coch/2011 for the assessment year 2007-08. The Revenue contends that the non-deduction of tax at source on agency commission paid to a foreign company for marketing support is untenable under section 195(1) of the Income Tax Act. The assessee, Southern Borewells, entered into a contract with Mozambique Holdings Ltd. to provide marketing and negotiation support for borewell projects abroad. The agent’s payment was to be made in foreign currency and was connected to services to be performed outside India; the contract specifies responsibilities and authority to represent the contractor in negotiations. The Assessing Officer disallowed part of the agency commission, and the Commissioner of Income Tax (Appeals) upheld the tax-withholding liability. The Tribunal held that no part of the payment constitutes income accrued in India since the work was performed outside the country and the payment was made abroad, citing GE Technology Centre Pvt. Ltd. v. C.I.T. and Delhi High Court’s EON Technology Services in support. It noted that amendments to Finance Act 2008 brought into force from 1 April 2008 do not apply to the preceding year 2007-08. The High Court, in dismissal of the appeal, affirmed that no substantial question of law arises and that no Indian-sourced income arises from the transaction.

Provisions of Law Cited

Section 195(1) of the Income Tax ActFinance Act 2008 (as amended)Finance Act 2012 (as applicable)

Submissions & Arguments

Contentions of Appellants / Petitioners

Revenue contends that the decision in GE Technology Centre Pvt. Ltd. v. CIT applies, asserting that under section 195(1) the payer becomes an assessee in default if he fails to withhold tax when the payments represent income chargeable to tax. It emphasizes that the 2008 amendments to the Finance Act, though brought into force from 01-04-2008, should be considered for the relevant period, and disputes the Tribunal’s reliance on the pre-2008 regime. It argues that where payments are made to a non-resident suggesting income element, withholding duties may arise, even if the service is performed outside India, depending on the character of the income and the source of accrual.

Contentions of Respondents

The assessee argues that because the entire contract is to be executed outside India, the payment to the foreign agent cannot be treated as income accrued in India. The payment is in foreign currency and the services are rendered abroad, with no Indian permanent establishment involved. Consequently, there is no Indian-sourced income chargeable to tax for AY 2007-08, and no withholding tax is due under section 195(1). The Tribunal’s reliance on GE Technology and the Delhi High Court's EON Technology Services supports that pre-2008 amendments do not apply to the year in question, and the appeal should be dismissed as lacking substantial questions of law.

Cited Precedents (2)

Case Name	Citation	Treatment	Explanation
GE Technology Centre Pvt. Ltd. v. Commissioner of Income Tax	327 ITR 457 (SC)	Positive	Cited to support the proposition that withholding under s.195(1) depends on whether there is income chargeable to tax in India; the court relied on it to hold no Indian-sourced income arising from the foreign payment for AY 2007-08.
EON Technology Services	246 CTR (Del) 40	Positive	Cited as a similar view by the Delhi High Court that pre-2008 amendments do not apply to the year in question, reinforcing the majority view that no withholding tax was required for the subject transaction.

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Extracted Judgment Text

Exact text extracted from official judgment records.

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT:** **THE HON'BLE THE CHIEF JUSTICE DR. MANJULA CHELLUR & THE HONOURABLE MR.JUSTICE A.M.SHAFFIQUE** **TUESDAY, THE 10TH DAY OF DECEMBER 2013/19TH AGRAHAYANA, 1935** ## **ITA.No. 205 of 2012** **--------------------------[AGAINST THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN I.T.A.NO. 415/COCH/2011 DATED 29-02-2012 FOR THE ASSESSMENT YEAR 2007-08]** **..................** ## **APPELLANT/RESPONDENT:** **----------------------------------------** **THE COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM.** **BY SRI.JOSE JOSEPH, S.C.** **RESPONDENT/APPELLANT:** **----------------------------------------** **M/S.SOUTHERN BOREWELLS, SHREYAS, SASTRI JUNCTION, KOLLAM, PIN - 691 001.** **THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 10-12-2013, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** **Prv.** **I.T.A. NO.205/2012:** ## **APPENDIX** ## **PETITIONER'S ANNEXURES:** **ANNEXURE A: COPY OF THE AGREEMENT BETWEEN THE ASSESSEE AND THE AFRICAN COMPANY, M/S. MOZAMBIQUE HOLDINGS LTD. ANNEXURE B: COPY OF THE ASSESSMENT ORDER U/S. 143 (3) DT. 30/12/2009. ANNEXURE C: COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) DTD. 25/03/2011. ANNEXURE D: COPY OF THE ORDER OF THE INCOME TAX APPELLATE - TRIBUNAL DTD. 29/02/2012 WITH A COPY.** ## **RESPONDENT'S ANNEXURES: NIL.** ## **//TRUE COPY//** **P.A. TO JUDGE.** **Prv.** ## **MANJULA CHELLUR, CJ & A.M.SHAFFIQUE, J. * * * * * * * * * * * * *** I.T.Appeal No.205 of 2012 ---------------------------------------Dated this the 10[th] day of December 2013 ## **J U D G M E N T** ## **SHAFFIQUE,J** Appeal is filed by the revenue with reference to the order passed by the Income Tax Appellate Tribunal, Cochin Bench in I.T.A.No.415/Coch/2011. 2. The issue involved in the above appeal is with reference to non-deduction of tax at the time of making payment to a foreign company as agency commission. The assessee entered into a contract for providing marketing support to win the contract for construction of bore wells in a foreign country. The agent was M/s.Mozambique Holdings Ltd. does not have a permanent establishment in India and the agency commission had to be paid in a foreign country. I.T.A.No.205 of 2012 2 The assessing officer found that an amount of Rs.5,02,05,613/- is debited as agency commission in the accounts. The agency commission payable as on 31/3/2007 is Rs.4,26,26,195/-. It is found that the said amount is not fully paid and therefore it is not an allowable deduction. Assessment was therefore completed disallowing the said amount in addition to certain other expenditure. 3. The assessee preferred an appeal before the Commissioner of Income Tax (Appeals). With reference to agency commission, the appellate authority found that the amount paid as agency commission is an income which is needed to have accrued in India and therefore the assessee was liable to deduct tax on such payments in the foreign country. The assessee preferred a further appeal before the Tribunal. The Tribunal found that the agency commission was payable in foreign exchange. Reference was made to Clause III, the responsibilities under the contract which reads as under: I.T.A.No.205 of 2012 3 ## _“Clause III_ _Responsibilities of the Contractor_ _3.1 The Contractor agrees to provide the consultant all necessary technical input on the proposal made to the National Directorate of Water and respond to all queries on the project within the time frame._ _3.2 The Contractor is committed to provide authorizations for the consultant to represent the Contractor in negotiations related to the contract._ _3.3. The Contractor undertakes to fulfill all financial obligations of the agreement within the provisions of the agreement.”_ 4. The entire work was to be done outside the country and the payment to the agent has to be made in the foreign country in foreign currency. The only factor is that the assessee is a resident in India. It is found that the I.T.A.No.205 of 2012 4 payment made outside the country cannot be construed as income accrued in India and therefore no part of the income of M/s.Mozambique Holdings Ltd. in India is taxable under the Income Tax Act. The Tribunal referred to the judgment of the Supreme Court in **GE Technology Centre pvt.Ltd. v. Commissioner of Income Tax** _[(2010) 327 ITR 457(SC)]_ and found that the assessee is not liable to deduct tax since no part of the payment made to M/s.Mozambique Holdings Ltd. is liable to tax in India. 5. On behalf of the Revenue the main contention urged is the applicability of the **GE Technology** case (supra) to the facts of the present case. In the aforesaid judgment the Supreme Court while considering the scope of Section 195(1) especially the expression “sum chargeable under the provisions of the Act” observed that the payer becomes an assessee in default only when he fails to fulfill the statutory obligation under Section 195(1). If the payment does not contain the element of income the payer cannot be made I.T.A.No.205 of 2012 5 liable. Further it is held that when the payer remits an amount to a non resident out of India, he claims deduction or allowances under the Income tax Act for the said sum as an expenditure. The Supreme Court referred to the amendment made to the Finance Act 2008 with effect from 1[st] April 2008 and observed that since the provision has been brought into force only from 01/04/2008, it will not apply for the period prior to the same. It is based on the said view that the Tribunal came to a finding that the assessee is not liable to deduct tax with respect to the above transaction. 6. Delhi High Court also in EON Technology Services [(2012) 246 CTR (Del) 40] has taken a similar view. Apparently, the amendments made by Finance Act 2012 will have no application to the facts of the case as the payment relates to the assessment year 2007-08. No grounds have been raised in the appeal which warrants interference. We do not think that any substantial 6 I.T.A.No.205 of 2012 question of law arises for consideration and accordingly we dismiss the appeal. (sd/-) **(MANJULA CHELLUR, CHIEF JUSTICE)** (sd/-) **(A.M.SHAFFIQUE, JUDGE)** jsr ## I.T.A.No.205 of 2012 7 ## I.T.A.No.205 of 2012 8